Forex: Euro Weakness To Accelerate, British Pound To Consolidate Further

DailyFX

Sep. 8, 2011, 9:00 AM

The Euro extended the overnight decline as the central bank talked down speculation for higher borrowing costs, and the single-currency may trade heavy throughout the remainder of the week as interest rate expectations falter.

Talking Points

Euro: ECB Holds Rate At 1.50%, Softens Hawkish Rhetoric

British Pound: BoE Maintains Current Policy, All Eyes On Policy Meeting Minutes

U.S. Dollar: Mixed Across The Board, Fed Chairman Bernanke On Tap

Euro: ECB Holds Rate At 1.50%, Softens Hawkish Rhetoric

After holding the benchmark interest rate at 1.50%, the European Central Bank continued to soften its hawkish tone for monetary policy, and the Governing Council may step up its efforts to shore up the economy as the downside risk for growth intensifies. Indeed, the downward revision in the growth forecast paired with expectations for softer inflation should lead the ECB to carry its current policy into the following year, but the central bank could be forced to take additional steps in addressing the ongoing turmoil within the financial system as European policy makers struggle to restore investor confidence. Given the increased reliance on the ECB, we may see President Jean-Claude Trichet set the stage for additional monetary support before he leaves the helm later this year, and the recent weakness in the single-currency may gather pace over the near-term as the central bank turns increasingly cautious towards the economy. As the EUR/USD slips to a fresh monthly low of 1.3944, it seems as though we will see the pair threaten the rebound from July (1.3836), and the euro may continue to give back the advance from earlier this month as the fundamental outlook for Europe deteriorates.

British Pound: BoE Maintains Current Policy, All Eyes On Policy Meeting Minutes

The British Pound continued to recoup the losses from earlier this month, with the GBP/USD advancing to a high of 1.6051, and we should see the exchange rate consolidate in the days ahead as market participants weigh the outlook for monetary policy. Indeed the Bank of England refrained from releasing a policy statement after keeping the benchmark interest rate at 0.50% while maintaining the asset purchase target at GBP 200B, and the policy meeting minutes due out on September 21 is likely to heavily influence future price action for the sterling as market participants speculate the central bank to expand monetary policy further over the coming months. In light of the slowing recovery, the policy statement could reveal a growing rift within the MPC, and the committee may show a greater willingness to increase its asset purchases as Governor Mervyn King sees a risk of undershooting the 2% target for inflation. In turn, the near-term correction should gather pace in the days ahead, and the GBP/USD looks poised to trend sideways ahead of the BoE minutes as the pair finds support ahead of 1.5900.

U.S. Dollar: Mixed Across The Board, Fed Chairman Bernanke On Tap

U.S. dollar price action was largely mixed on Thursday, but we may see the reserve currency regain its footing during the North American trade as equity futures foreshadow a lower open for the U.S. market. Should we see risk aversion flow back into the foreign exchange market, the shift in sentiment will help to prop up the reserve currency, but dovish comments from Fed Chairman Ben Bernanke could weigh on the exchange rate as the central bank head talks up speculation for additional monetary stimulus. As the FOMC is scheduled to hold a two-day meeting in September, the committee may draw up a range of policy tools to shore up the ailing economy, and the USD may trade heavy over the near-term as central bank pledges to carry its zero interest rate policy well into 2013.